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Do You Understand The Social Security "Earnings Penalty?"

November  2022 

If you keep working or return to work after receiving Social Security benefits, your benefits may seem reduced, perhaps if your annual income exceeds a certain threshold. This phenomenon is known as the Social Security "earnings penalty."

The "earnings penalty" can potentially affect you if you are younger than Social Security's full retirement age (FRA), which ranges between 66 and 67 for baby boomers.

Before you reach your FRA, Social Security will deduct $1 from your benefit payments for every $2 you earn above its yearly earnings limit. For 2022, that limit is $19,560. Similarly, Social Security deducts $1 in benefits for every $3 you earn above another threshold in the year you reach your FRA. For 2022, this limit is $51,960. (Both of these limits get adjusted for inflation.)

The cut to your monthly retirement benefits applies for the remaining months of a calendar year after your earned income tops the annual limit. The good news is that once you reach your FRA, you can earn as much as you want without impacting your Social Security benefits.

In the big picture, this reduction in your Social Security benefits is temporary. Once you reach your FRA, Social Security recalculates your retirement benefits and credits you for the months when you didn't receive them because of the "earnings penalty," which implies larger retirement benefits for you in the future.1